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It’s difficult to have a standard portfolio construction applicable for everyone; but if asset allocation is at the core of portfolio construction, then investors may tentatively use the formula of [100]-[investor’s age] to determine equity investment levels.
In an age where alpha returns are fast disappearing from large-cap equity investment buckets, where are wealthy investors putting in their money for higher and higher returns? The answer, or a part of the answer, may be found in constructing the investment portfolio with asset allocation as a core principle, supported by riskier investments into Alternate Investment Funds (AIFs). This could help investors earn extra gains over the large-cap stock market holdings, says Rahul Jain, Head, Personal Wealth, Edelweiss Wealth Management.
It’s difficult to have a standard portfolio construction applicable for everyone; but if asset allocation is at the core of portfolio construction, then investors may tentatively use the formula of [100]-[investor’s age] to determine equity investment levels, Rahul Jain said in an interview with FinancialExpress.com. So, for example, a 30-year-old investor could put in 70% of their investments into equities, with the remaining being in debt, and some amount in gold.
Watch the full interview of Rahul Jain, Head, Personal Wealth, Edelweiss Wealth Management on Alternative investments here.
Investors must consider three factors: their risk appetite; whether they want to make the portfolio complex or simple; and what type of portfolio size they have. A simple and easy-to-execute portfolio would comprise buying large cap equity ETFs; buying Bharat Bonds, or government taxable bonds for the debt component; and then buying gold ETFs, Rahul Jain shared as an example of a type of portfolio construction. ‘It might not generate a significant outperformance but will deliver a large part of the thought process in terms of asset allocation,’ he said.
Now, for a higher alpha, one could look at other avenues too, such as Alternate Investment Fund (AIF) strategies within the equity bucket. On the fixed income, if investors’ risk appetite is a little higher, they could look at AA-rated NCDs. One could potentially look at 300-400 bps of alpha over large-cap equities, Rahul Jain said, albeit with a much higher risk to the portfolio, and that is too difficult to quantify. In fact, for large-cap equity investments, one must consider low-cost options, such as ETFs. So much so that now a large part of the so-called smart money is going into large-cap ETFs, he elaborated.
Increasingly, trends in PMS (Portfolio Management Services) in terms of advice and offerings are also very similar, in that investors are looking at creating value on the equity portfolio side. PMS allows that niche to come in, according to Rahul Jain. A lot of PMSes are also adding AIFs as a category in their portfolio. Would alternative investments work for do-it-yourself investors? This would again depend on the above three factors – one’s risk appetite, portfolio complexity, and portfolio size, said Rahul Jain.